Europe needs the single market in services

By Daniel Gros

Financial Times

Published: April 7 2005

The proposal
for a new European Union services directive, issued when Frits
Bolkestein was single market commissioner, is under attack from all
sides. Dubbed the "Frankenstein directive", it has been billed
"unacceptable" by Jacques Chirac, the French president, and is
playing a big role in the French referendum on the EU's
constitutional treaty. Last month's European summit called for it to
be revised "to safeguard the European social model".

All this excitement is difficult to understand. Europe's single
market was supposed to come into effect on January 1 1993, providing
freedom of movement in four areas - goods, capital, people and
services. The single market for services does not yet work because
numerous sectors still hide behind de facto national barriers.
Companies and individuals operating in these sectors are
understandably upset that their turf is threatened.

Yet this lack of a single market in services has been known for
some time. When EU leaders met in Lisbon in 2000, they agreed to put
together by the end of that year "a strategy for the removal of
barriers to services". Mr Chirac and Gerhard Schr÷der, his German
counterpart, are among the few EU leaders present at the Lisbon
summit who are still in office, which makes their opposition to the
services directive particularly disingenuous.

What does this monstrous proposal actually contain? No radically
new elements. It lays out three ways in which services can be
provided across borders: a company can send an employee abroad; an
individual can set up shop in another country; or someone can
provide a cross-border service from his or her home country.

The legal framework for the first option is already clear under
another directive on the posting of workers. European case law on
freedom of establishment applies to the second option: a lawyer,
say, or a doctor wishing to establish an operation abroad has to
fulfil the requirements of the host country, but these requirements
cannot be used to discriminate against EU nationals from another
member state. It is only in the third case that the legal framework
is not entirely clear. But given the presumption that there should
be an internal market in services, the European Court has repeatedly
struck down national barriers to trade in services. The directive's
main contribution is to codify existing case law by explicitly
stating the country-of-origin principle - under which home-country
rules apply to cross-border service providers - and listing
prohibited discriminatory or restrictive measures.

The directive will finally open a market that represents roughly
half of EU gross domestic product. The potential gains should be
considerable. No other initiative being debated by EU leaders would
do as much to improve the continent's competitiveness and
employment. A study published in January by Copenhagen Economics, a
consultancy, suggests that the directive could create up to 600,000
jobs and raise foreign investment in the services industry by up to
34 per cent*.

But enlargement of the EU last May has fuelled concerns on the
part of citizens of existing member states that the directive will
lead to "social dumping", if higher standards of social protection
in richer member states are eroded by competition from lower-cost
countries. The adverse reaction in Germany and France's railing
against an EU with a "liberal" bias show how "old" Europe prefers to
moan about unfair competition rather than turn enlargement into an
opportunity.

As the directive cannot be changed substantially without
violating the basic principles of the EU single market, this seems
to be a case of an irresistible force meeting an immovable object.

Mr Chirac's repeated suggestions that the Commission should
withdraw its proposal are reminiscent of the statement by his
predecessor, Franšois Mitterrand, on the eve of the 1992 French
referendum on the Maastricht treaty on European monetary union, that
"of course, the European Central Bank will not be independent".

Once the treaty was approved, that was soon forgotten. If the
French approve the EU's constitutional treaty next month, the same
will probably happen to Mr Chirac's statements and the services
directive will be approved once the dust has settled. If the French
vote No, however, the directive will be only the first victim. Old
Europe will have shown that it resists the necessary reforms and
will condemn itself to continued economic
underperformance.

*Economic Assessment of the
Barriers to the Internal Market for Services,
www.copenhageneconomics.com